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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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Commission file number 1-12372
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CYTEC INDUSTRIES INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3268660
------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
-------------------------------
(Address of principal executive offices)
973-357-3100
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
There were 38,500,717 shares of common stock outstanding at March 31, 2003.
INDEX
Page
========
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative And Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS 21
EXHIBIT INDEX 23
2
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Millions of dollars, except per share amounts)
Three Months Ended
March 31,
------------------------------
2003 2002
----------- -----------
Net sales $ 367.4 $ 318.0
Manufacturing cost of sales 272.4 248.0
Selling and technical services 30.1 31.7
Research and process development 8.2 8.9
Administrative and general 11.8 13.2
Amortization of acquisition intangibles 0.8 0.8
----------- -----------
Earnings from operations 44.1 15.4
Other expense, net 1.2 0.9
Equity in earnings of associated companies 2.5 1.1
Interest expense, net 4.1 5.1
----------- -----------
Earnings before income taxes and cumulative effect of a change in 41.3 10.5
accounting principle
Income tax provision 12.4 3.5
----------- -----------
Earnings before cumulative effect of a change in accounting
principle 28.9 7.0
Cumulative effect of a change in accounting principle, net of taxes
of $7.3 (13.6) -
----------- -----------
Net earnings $ 15.3 $ 7.0
=========== ===========
Earnings before cumulative effect of a change in accounting
principle per common share
Basic $ 0.75 $ 0.18
Diluted $ 0.73 $ 0.17
Cumulative effect of a change in accounting principle per common
share
Basic $ (0.35) $ -
Diluted $ (0.34) $ -
Earnings per common share
Basic $ 0.39 $ 0.18
Diluted $ 0.38 $ 0.17
See accompanying Notes to Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Millions of dollars, except share and per share amounts)
March 31, December 31,
2003 2002
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 92.8 $ 210.0
Trade accounts receivable, less allowance for doubtful accounts
of $8.0 and $8.8 in 2003 and 2002, respectively 217.9 199.7
Other accounts receivable 41.7 39.3
Inventories 152.0 131.3
Deferred income taxes 15.4 17.3
Other current assets 14.3 7.2
------------ ------------
Total current assets 534.1 604.8
Investment in associated companies 90.1 90.4
Plants, equipment and facilities, at cost 1,408.0 1,383.4
Less: accumulated depreciation (828.1) (805.5)
------------ ------------
Net plant investment 579.9 577.9
Acquisition intangibles, net of accumulated amortization 38.8 39.5
Goodwill 334.1 334.0
Deferred income taxes 83.6 71.6
Other assets 28.3 33.3
------------ ------------
Total assets $ 1,688.9 $ 1,751.5
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturity of long-term debt $ - $ 99.9
Accounts payable 112.1 99.5
Accrued expenses 166.6 175.8
Income taxes payable 65.0 55.6
------------ ------------
Total current liabilities 343.7 430.8
Long-term debt 216.2 216.0
Pension and other postemployment benefit liabilities 353.6 359.3
Other noncurrent liabilities 140.8 122.5
Stockholders' equity
Preferred stock, 20,000,000 shares authorized;
issued and outstanding 4,000 shares, Series C Cumulative,
$.01 par value at liquidation value of $25 per share 0.1 0.1
Common stock, $.01 par value per share, 150,000,000
shares authorized; issued 48,132,640 shares 0.5 0.5
Additional paid-in capital 129.7 131.1
Retained earnings 920.7 905.5
Unearned compensation (5.3) (6.8)
Additional minimum pension liability (98.0) (98.0)
Unrealized loss on derivative instruments (0.2) -
Accumulated translation adjustments (13.3) (18.8)
Treasury stock, at cost, 9,631,923 shares in 2003, and
9,332,671 shares in 2002 (299.6) (290.7)
------------ ------------
Total stockholders' equity 634.6 622.9
------------ ------------
Total liabilities and stockholders' equity $ 1,688.9 $ 1,751.5
============ ============
See accompanying Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of dollars)
Three Months Ended
March 31,
2003 2002
--------- --------
Cash flows provided by (used for) operating activities
Net earnings $ 15.3 $ 7.0
Noncash items included in net earnings:
Dividends from associated companies greater
(less) than earnings 0.6 (1.1)
Depreciation 21.6 20.1
Amortization 1.2 1.9
Deferred income taxes (10.3) (0.7)
Loss on asset write-off - 7.2
Cumulative effect of change in accounting principle, net of tax 13.6 -
Other - (0.1)
Changes in operating assets and liabilities:
Trade accounts receivable (16.6) (11.9)
Other receivables (2.4) 4.6
Inventories (19.5) (4.4)
Accounts payable 12.3 2.5
Accrued expenses (9.2) 8.1
Income taxes payable 17.7 (0.1)
Other assets (2.7) (2.1)
Other liabilities (11.5) (9.4)
--------- --------
Net cash flows provided by operating activities 10.1 21.6
--------- --------
Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (18.9) (11.6)
Proceeds received on sale of assets 0.1 -
--------- --------
Net cash flows used for investing activities (18.8) (11.6)
--------- --------
Cash flows provided by (used for) financing activities
Proceeds from the exercise of stock options and warrants 1.7 0.6
Purchase of treasury stock (11.3) (2.9)
Repayment of long-term debt (100.0) -
--------- --------
Net cash flows used for financing activities (109.6) (2.3)
--------- --------
Effect of exchange rate changes on cash and cash equivalents 1.1 (0.9)
--------- --------
Increase (decrease) in cash and cash equivalents (117.2) 6.8
Cash and cash equivalents, beginning of period 210.0 83.6
--------- --------
Cash and cash equivalents, end of period $ 92.8 $ 90.4
========= ========
See accompanying Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Millions of dollars, except per share amounts, unless otherwise indicated)
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. The
statements should be read in conjunction with the consolidated financial
statements and notes to the consolidated financial statements contained in the
Company's 2002 Annual Report on Form 10-K.
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year's presentation.
(2) EARNINGS PER SHARE (EPS)
Basic earnings per common share excludes dilution and is computed by dividing
net earnings less preferred stock dividends by the weighted-average number of
common shares outstanding (which includes shares outstanding, less performance
and restricted shares for which vesting criteria have not been met) plus
deferred stock awards, weighted for the period outstanding. Diluted earnings per
common share is computed by dividing net earnings less preferred stock dividends
by the sum of the weighted-average number of common shares outstanding for the
period increased for all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued and any
proceeds of the issuance had been used to repurchase common stock at the average
market price during the period. The proceeds used to repurchase common stock are
assumed to be the sum of the amount to be paid to the Company upon exercise of
options, the amount of compensation cost attributed to future services and not
yet recognized and the amount of income taxes that would be credited to or
deducted from capital upon exercise.
The following represents the reconciliation of the numerators and denominators
of the basic and diluted EPS computations:
Three Months Ended March 31,
2003 2002
------------------------------------------ ---------------------------------------------
Weighted Avg. Per Weighted Avg. Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS 38,734,611 39,703,472
- ---------
Earnings before cumulative effect of
change in accounting principle $ 28.9 $ 0.75 $ 7.0 $ 0.18
Cumulative effect of accounting change (13.6) (0.35) - -
----------- -------- ----------- --------
Net earnings 15.3 $ 0.39 $ 7.0 $ 0.18
Diluted EPS
- -----------
Effect of dilutive securities
- -----------------------------
Options 912,603 865,018 -
Performance / Restricted stock 116,808 93,042 -
Warrants - 2,499 -
------------ ------------
Weighted average shares 39,764,022 40,664,031
- -----------------------
Earnings before cumulative effect of
change in accounting principle $ 28.9 $ 0.73 $ 7.0 $ 0.17
Cumulative effect of accounting change (13.6) (0.34) - -
----------- -------- ----------- --------
Net earnings 15.3 $ 0.38 $ 7.0 $ 0.17
- ----------------------------------------------------------------------------------------------------------------------------------
(3) STOCK-BASED COMPENSATION
The Company accounts for its stock based compensation under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based compensation cost is reflected in net income for stock options, as
all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of the grant. Compensation cost
for restricted stock is recorded based on the market value on the date of grant,
and compensation cost for performance stock is recorded based on the quoted
market price of the Company's common stock at the end of each period through the
date of vesting. The fair value of restricted and performance stock is charged
to unearned compensation in Stockholders' Equity and amortized to expense over
the requisite vesting periods.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Millions of dollars, except per share amounts, unless otherwise indicated)
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" to stock-based employee
compensation:
Three Months Ended
March 31,
-------------------------
2003 2002
-------- --------
Net earnings, as reported $ 15.3 $ 7.0
Add:
Stock-based employee compensation expense
included in reported net income, net of related tax - 0.5
effects
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects 1.9 2.3
-------- --------
Pro forma net earnings $ 13.4 $ 5.2
======== ========
Earnings per share:
Basic, as reported $ 0.39 $ 0.18
Basic, pro forma 0.35 0.13
Diluted, as reported $ 0.38 $ 0.17
Diluted, pro forma 0.34 0.13
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
2003 2002
-------------------------------------------------------------------------------------------
Expected life (years) 5.6 5.6
Expected volatility 47.3 % 47.4 %
Expected dividend yield - -
Risk-free interest rate 2.9 % 3.3 %
Weighted average fair value of options granted
during the period $ 12.52 $ 11.65
(4) RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146"). SFAS 146 nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" ("EITF 94-3") and requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value in the period in which the liability is incurred. Under
EITF 94-3, a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. The adoption of SFAS 146 results in delayed
recognition for certain types of costs as compared to the provisions of EITF
94-3. SFAS 146 became effective for new exit or disposal activities initiated
after December 31, 2002. SFAS 146 will affect the types and timing of costs
included in future restructuring programs, if any, but did not have any impact
on the Company's consolidated financial position or results of operations for
the first quarter of 2003.
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal use of an asset. SFAS 143 requires that the fair value of the
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability the Company will recognize a gain or loss on settlement.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Millions of dollars, except per share amounts, unless otherwise indicated)
On January 1, 2003, the Company recorded an increase in long-term liabilities of
$22.8, an increase in the gross carrying value of Plants, Equipment and
Facilities of $5.3 and related accumulated depreciation of approximately $3.4, a
long-term deferred tax asset of $7.3 and an after-tax charge of $13.6 for the
cumulative effect of prior years for depreciation of the additional costs and
accretion expense on the asset retirement liability. The long-term liability
relates primarily to estimated costs for disposal of building materials and
other closure obligations for existing structures upon renovation, closure or
dismantlement of certain of the Company's facilities. At March 31, 2003, the
asset retirement liability was $23.1. Accretion and depreciation expense
recognized in the first quarter of 2003 were $0.4. The pro forma amount of the
asset retirement liability as of March 31, 2002, was $21.6. The pro forma
amounts of the asset retirement liability were measured using information,
assumptions and interest rates as of the adoption date of January 1, 2003. Pro
forma net earnings and earnings per share for the quarter ended March 31, 2002,
assuming SFAS 143 had been applied as of January 1, 2002, are as follows:
Quarter ended March 31, 2002 Net Earnings Basic EPS Diluted EPS
As Reported $7.0 $0.18 $0.17
Pro forma amounts $6.7 $0.17 $0.16
(5) INVENTORIES
The inventories consisted of the following:
March 31, December 31,
2003 2002
--------------- ---------------
Finished goods $ 93.9 $ 81.4
Work in process 21.5 15.1
Raw materials & supplies 67.3 65.5
--------------- ---------------
182.7 162.0
Less reduction to LIFO cost (30.7) (30.7)
--------------- ---------------
$ 152.0 $ 131.3
=============== ===============
(6) EQUITY IN EARNINGS OF ASSOCIATED COMPANIES
Summarized financial information for the Company's equity in earnings of
associated companies is as follows:
Three Months Ended
March 31,
2003 2002
--------------- ---------------
Net sales $ 79.5 $ 67.7
Gross profit 15.6 14.1
Earnings before cumulative effect of change
in accounting principle 4.5 2.2
Cumulative effect of adoption of SFAS 143,
net of tax (0.2) -
--------------- ---------------
Net earnings $ 4.3 2.2
--------------- ---------------
The Company's equity in earnings
of associated companies $ 2.5 $ 1.1
-----------------------------------------------------------------------------------------------
The Company's equity in cumulative effect of
adoption of SFAS 143, net of tax,
of associated companies $ (0.1) $ -
-----------------------------------------------------------------------------------------------
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Millions of dollars, except per share amounts, unless otherwise indicated)
(7) ENVIRONMENTAL MATTERS AND OTHER CONTINGENT LIABILITIES
As of March 31, 2003, and December 31, 2002, the aggregate environmental related
accruals were $83.3 and $83.7, respectively. As of March 31, 2003, and December
31, 2002, $15.0 of the above amounts were included in accrued expenses, with the
remainder included in other noncurrent liabilities. Environmental remediation
spending for the three months ended March 31, 2003 and 2002, was $1.5 and $1.6,
respectively. All accruals have been recorded without giving effect to any
possible future insurance proceeds.
The Company is also a party to various other claims and litigation. Based on the
advice of counsel, management believes that the resolution of such claims and
litigation will not have a material adverse effect on the consolidated financial
position of the Company, but could be material to the consolidated results of
operations of the Company in any one accounting period.
(8) COMPREHENSIVE INCOME
The components of comprehensive income, which represents the change in equity
from non-owner sources, are as follows:
Three Months Ended
March 31,
2003 2002
------------- ------------
Net earnings $ 15.3 $ 7.0
Other comprehensive income (loss):
Unrealized gain (loss) on derivative instruments (0.2) 0.1
Foreign currency translation adjustments 5.5 (3.0)
------------- ------------
Comprehensive income $ 20.6 $ 4.1
============= ============
(9) OTHER FINANCIAL INFORMATION
Taxes paid for the three months ended March 31, 2003 and 2002, were
approximately $6.1 and $3.0, respectively. Interest paid for the three months
ended March 31, 2003 and 2002 was approximately $6.6 in both periods.
At March 31, 2003, and December 31, 2002, the Company's long-term debt consisted
of public debt, including the current maturity of long-term debt, in the amounts
of $216.2 and $315.9, respectively. The Company repaid $100.0 of debt in the
first quarter of 2003 that had been recorded as a current liability at December
31, 2002.
In April 2002, the Company executed a $100.0, three-year unsecured revolving
credit agreement and a $100.0, 364-day unsecured revolving credit agreement with
a one-year term out option which was renewed in April 2003. These two agreements
replaced a $200.0 unsecured revolving credit agreement that was due to expire in
July 2002. Revolving loans under the new agreements are available for the
general corporate purposes of the Company and its subsidiaries, including
without limitation, for purposes of making acquisitions. The credit agreements
contain covenants customary for such facilities.
In March 2003, the Company announced an authorization of $100.0 to repurchase
shares of its outstanding common stock. The repurchases are made from time to
time on the open market or in private transactions and the shares obtained under
this authorization are anticipated to be utilized for stock option plans,
benefit plans and other corporate purposes. The Company repurchased
approximately 384,100 shares of stock at a cost of $11.3 during the first
quarter of 2003 that completed its previous authorization and that included the
purchase of approximately 57,600 shares under this new authorization.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Millions of dollars, except per share amounts, unless otherwise indicated)
(10) SEGMENT INFORMATION
Summarized segment information follows:
Three Months Ended
March 31,
2003 2002
----------------- ---------------
Net Sales
---------
Water and Industrial Process Chemicals $ 85.8 $ 75.6
Performance Products 119.8 108.5
Specialty Materials 108.1 103.1
Building Block Chemicals
Sales to external customers 53.7 30.8
Intersegment sales 16.4 11.6
----------------- ---------------
Net sales from segments 383.8 329.6
Elimination of intersegment revenue (16.4) (11.6)
----------------- ---------------
Total consolidated net sales $ 367.4 $ 318.0
================= ===============
% of % of
Earnings (loss) from operations Sales Sales
------------------------------- ------ -----
Water and Industrial Process Chemicals $ 6.9 8% $ 5.4 7%
Performance Products 11.8 10% 6.6 6%
Specialty Materials 22.3 21% 20.5 20%
Building Block Chemicals 4.3 6% (0.5) -1%
-------- -------
Earnings from segments 45.3 12% 32.0 10%
Corporate and Unallocated (1) (1.2) (16.6)
-------- -------
Total consolidated earnings from operations $ 44.1 12% $ 15.4 5%
======== =======
(1) Three months ended March 31, 2002 includes net restructuring charges of $14.8. (See Note 12).
(11) OTHER ACQUISITION INTANGIBLES
Other acquisition intangibles consisted of the following major classes:
Gross Acquisition
carrying Accumulated intangibles,
value amortization net
------------ ------------ --------------
Technology-based $ 29.9 $ (7.3) $ 22.6
Marketing-related 9.5 (2.3) 7.2
Customer-related 11.9 (2.9) 9.0
------------ ------------ --------------
Total $ 51.3 $ (12.5) $ 38.8
============ ============ ==============
Amortization of acquisition intangibles for the three months ended March 31,
2003, was $0.8. Assuming no change in the gross carrying amount of acquisition
intangibles, the estimated amortization of acquisition intangibles for the
fiscal years 2003 through 2005 is $3.1 and for the years 2006 and 2007 is $3.0.
At March 31, 2003, there were no acquisition intangibles with indefinite useful
lives as defined by SFAS 142.
(12) Restructuring of Operations
In the first quarter of 2002, the Company recorded an aggregate restructuring
charge of $16.6, which included the elimination of 135 positions worldwide. The
charge was comprised of the following initiatives: reorganization of the
Specialty Chemicals segments resulting in a reduction of 65 personnel and a
charge of $5.7 for employee related costs; alignment of the Specialty Materials
segment in connection with reduced demand in the commercial aerospace industry
resulting in a reduction of 47 personnel and a charge of $1.6 for employee
related costs; closure of the Woodbridge, New Jersey facility resulting in the
elimination of 23 positions and a charge of $1.6 for employee related and
decommissioning costs and the discontinuance of a minor unprofitable product
line resulting in a charge of $7.7 for the write-down of the net book value of
the fixed assets and costs of decommissioning the facility. The restructuring
costs were charged to the Consolidated Statement of Income as follows:
manufacturing cost of sales, $11.7; selling and technical services, $3.0;
research and process development, $1.0 and
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Millions of dollars, except per share amounts, unless otherwise indicated)
administrative and general, $0.9. During the fourth quarter of 2002, the Company
reduced this restructuring accrual as a result of incurring less costs than
originally estimated. As a result, the Company recognized a restructuring credit
of $0.6 in the Consolidated Statement of Income as follows: manufacturing cost
of sales, $0.1; selling and technical services, $0.4; and administrative and
general, $0.1. As of March 31, 2003, cash payments of $6.6 had been made for
these charges and the remaining liability to be paid was $2.2. The Company
expects that the majority of this liability will be paid in 2003. In addition,
during the first quarter of 2002 the Company recorded charges of $0.4 in equity
in earnings of associated companies for its 50% share of additional
restructuring charges related to CYRO Industries' shutdown of its Niagara Falls,
Ontario, Canada facility last year.
In 2001, the Company recorded a restructuring charge of $5.4 related to the
mothballing of the Fortier ammonia plant and the Company's share of the related
personnel reduction of 67 positions at the Fortier facility. During the first
quarter of 2002, the Company reduced this restructuring accrual as a result of
incurring fewer costs than originally estimated. As a result, the Company
recognized a restructuring credit of $0.5 in the Consolidated Statement of
Income as follows: manufacturing cost of sales, $0.4 and selling and technical
services, $0.1. This restructuring accrual was further reduced by $0.4 in the
fourth quarter of 2002 as a credit to manufacturing cost of sales. The personnel
reductions were completed in 2002. Cash payments of $3.4 had been made for these
charges through March 31, 2003 and the remaining liability to be paid was $0.2
that relates primarily to long-term severance payouts.
In 2000, the Company recorded a restructuring charge of $10.8 related to a
workforce reduction of approximately 110 employees and the discontinuance of a
tolling operation. During the first quarter of 2002, the Company reduced this
restructuring accrual as a result of incurring fewer costs than originally
estimated. As a result, the Company recognized a restructuring credit of $1.3 in
the Consolidated Statement of Income as follows: manufacturing cost of sales,
$0.5 and selling and technical services, $0.8. This restructuring accrual was
further reduced by $0.1 in the fourth quarter of 2002 as a credit to selling and
technical services. The personnel reductions were completed in 2002. Cash
payments of $6.7 had been made for these charges through March 31, 2003 and the
remaining liability to be paid was $0.7 that relates primarily to long-term
severance payouts.
(13) COMMODITY AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses natural gas forward contracts to selectively hedge gas utility
requirements at its Building Blocks Chemicals Fortier manufacturing facility.
Realized gains and losses on these contracts, if any, are included in the cost
of the commodity upon settlement of the contract. As of March 31, 2003, the
Fortier facility's 2003 remaining forecasted natural gas utility requirements
were 59% hedged and the 2004 forecasted natural gas utility requirements were
less than 5% hedged. At March 31, 2003, the Company had outstanding natural gas
forward contracts with a notional value of $12.5 and delivery dates of April
2003 through February 2004.
The Company also uses natural gas swaps to selectively hedge gas utility
requirements at certain of its other facilities. These swaps, which are
financially settled, are highly effective at achieving offsetting cash flows of
the underlying natural gas purchases and have been designated as cash flow
hedges as defined by SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The swaps are reported on the Consolidated Balance Sheets
at fair value, with offsetting amounts included in Unrealized Loss on Derivative
Investments on an after-tax basis. Gains and losses are reclassified into
earnings, as a component of Manufacturing Cost of Sales in the period the hedged
natural gas purchases affect earnings. As of March 31, 2003, the Company had
outstanding natural gas swaps with a fair value of $0.3, which will be
reclassified into Manufacturing Cost of Sales through February 2004 as these
swaps are settled.
In connection with the Company's stock repurchase program, the Company
selectively utilizes freestanding put option contracts that are indexed to the
Company's stock and entitle the holder to sell shares of the Company's common
stock to the Company at specified exercise prices. In lieu of purchasing the
shares from the put option holders, the Company has the right to elect
settlement by paying the holders of the put options the excess of the strike
price over the then market price of the shares in either cash or shares of the
Company's common stock (i.e., net cash or net share settlement). The put option
contracts are initially measured at fair value and reported in Stockholders'
Equity. Subsequent changes in fair value are not recognized in the financial
statements. During 2002 the Company sold 100,000 put options to an institutional
investor in a private placement. The put options entitled the holder to sell an
aggregate of 100,000 shares of the Company's common stock to the Company at an
exercise price of $29.505 per share. During 2002, the Company received aggregate
premiums of approximately $0.3 on the sale of such options. During the first
quarter of 2003, the holder elected to exercise the 100,000 put options, which
were settled by the Company purchasing 100,000 shares of its common stock at the
exercise price of $29.505 per share. The closing stock price on the settlement
date was $27.98 per share. At March 31, 2003, no put options were outstanding.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER OF 2003 VERSUS FIRST QUARTER OF 2002
Net sales for the first quarter of 2003 were $367.4 compared with $318.0 for the
first quarter of 2002. All segments reported higher sales. In the Company's
Specialty Chemical segments, demand kept pace with the second half 2002 levels
and several new business opportunities were realized. Specialty Materials sales
reflect higher replacement part purchases and what is believed to be inventory
rebuilding by certain customers from low year-end levels. Building Block
Chemical sales were up primarily due to improved acrylonitrile market
conditions.
Manufacturing cost of sales was $272.4 or 74.1 % of net sales in the first
quarter of 2003, compared to $248.0 or 78.0% of sales for the prior year period.
Included in the first quarter of 2002 is a $10.8 net restructuring charge, or
3.4% of net sales, for plant closure and expenses associated with discontinuing
a product line. Excluding this charge manufacturing cost of sales was 74.6%. The
improvement in the first quarter of 2003 is due to the Company's manufacturing
facilities running at higher capacity utilization levels, its operational
excellence programs and the effect of favorable exchange rate changes offset
somewhat by increased raw material, energy, employee benefit and insurance
costs. Freight costs were also higher as a result of freight surcharges applied
by carriers to cover the higher cost of fuel.
Selling and technical services decreased $1.6; research and development expenses
decreased $0.7; and administrative expenses decreased $1.4 million but included
in the prior year amounts are net restructuring charges of $2.1, $1.0 and $0.9,
respectively. After excluding the net restructuring charges from 2002, overall
operating expenses for the first quarter of 2003 were flat compared with the
prior year period. As the Company continues to focus on its growth initiatives,
the expectation is that selling and technical services costs will increase
somewhat throughout the year.
Equity in earnings of associated companies was $2.5, an increase of $1.4 over
the prior year period. This is principally due to higher sales and effective
cost controls at CYRO Industries, the Company's 50% owned acrylic plastics joint
venture.
Interest expense, net was $4.1, a decrease of $1.0 from the comparable period of
2002. This is primarily from higher cash balances outstanding and the resulting
interest income. The Company also repaid $100.0 of its existing debt late in the
quarter from its existing cash balances. The impact on interest expense was
immaterial in the first quarter of 2003 although interest expense should be
reduced going forward as the Company paid down debt accruing interest at 6.5%
with cash earning approximately 2%.
The income tax provision reflects an effective tax rate of 30.0% down from the
prior year's 33.5%. This reduction is a result of the company's emphasis on
global tax planning and execution of those plans together with an increased
level of investment and earnings in lower foreign tax jurisdictions.
Net earnings before the cumulative effect of the change in accounting principle
were $28.9 or $0.73 per diluted share in the first quarter of 2003 compared to
$7.0 million or $0.17 per diluted share in the first quarter of 2002. Included
in the first quarter of 2002 was an after-tax net restructuring charge of $10.1
or $0.25 per diluted share.
In the first quarter of 2003, the Company recorded an after-tax, non-cash charge
of $13.6 million ($0.34 per diluted share) reported as a cumulative effect of a
change in accounting principle. This applies to the adoption of Financial
Accounting Standard No. 143 (FAS 143), "Accounting for Asset Retirement
Obligations" which became effective January 1, 2003.
Net earnings after the cumulative effect of the change in accounting principle
as a result of adopting FAS 143 was $15.3 or $0.38 per diluted share.
12
SEGMENT RESULTS
First quarter 2003 to first quarter 2002 comparisons and analyses of changes in
net sales by business segment and region are set forth below.
Water and Industrial Process Chemicals:
- --------------------------------------------------------------------------------------------------------------------------
First First % Change Due to
Quarter Quarter Total --------------------------------------
2003 2002 % Change Price Volume/Mix Exchange
--------------------- ---------- --------------------------------------
North America $34.8 $33.1 5% -3% 8% 0%
Latin America 14.4 12.3 17% 10% 19% -12%
Asia/Pacific Rim 10.9 9.7 12% -4% 11% 5%
Europe/Middle East/Africa 25.7 20.5 25% -2% 10% 17%
---------------------------------------------------------------------------
Total $85.8 $75.6 13% -1% 11% 3%
- --------------------------------------------------------------------------------------------------------------------------
Selling volumes improved for all product lines 11% overall. North America
volumes were improved in water treatment where sales to the full service
customers continue to grow and in phosphines, which saw improved demand. In
Latin America the volume growth is attributable principally to the mining
chemicals product line as a result of higher demand in the alumina market.
Asia-Pacific volumes were up in all product lines while Europe's growth was in
the water treatment and mining chemical product lines. Selling prices in Latin
America were up offsetting the impact of negative exchange rate changes. Selling
prices were down in the other regions primarily due to changes in customer and
product mix.
Earnings from operations were $6.9 or 8% of sales in the first quarter of 2003
compared to $5.4 or 7% of sales in the first quarter of 2002. The improvement is
principally due to the leverage from the higher sales and production volumes
plus the effect of favorable exchange rate changes. Offsetting this somewhat
were increased raw material costs primarily propylene, and higher energy costs,
employee benefit costs and insurance costs.
Performance Products:
- --------------------------------------------------------------------------------------------------------------------------
First First % Change Due to
Quarter Quarter Total --------------------------------------
2003 2002 % Change Price Volume/Mix Exchange
--------------------- ---------- --------------------------------------
North America $61.6 $61.8 0% 1% -2% 1%
Latin America 7.2 5.9 22% 10% 29% -17%
Asia/Pacific Rim 20.3 15.5 31% -6% 32% 5%
Europe/Middle East/Africa 30.7 25.3 21% 1% -1% 21%
---------------------------------------------------------------------------
Total $119.8 $108.5 10% 1% 5% 4%
- --------------------------------------------------------------------------------------------------------------------------
Selling volumes were up 5% with all product lines contributing to the overall
growth. In North America volumes were down slightly in all product lines as
North American demand was essentially flat. Latin American and Asian volumes
were up in all product lines while Europe was down slightly principally from the
coatings markets. Selling prices were up in all regions except Asia where
selling prices were down in polymer additives although sales volume increased
but at lower than average selling prices.
Earnings from operations were $11.8 or 10% of sales in the first quarter of 2003
compared to $6.6 or 6% of sales in the first quarter of 2002. The improvement is
principally due to the leverage from the higher sales and production volumes
plus the effect of favorable exchange rate changes offset somewhat by increased
raw material costs primarily ammonia and methanol derivatives, and higher energy
costs, employee benefit costs and insurance costs.
13
- --------------------------------------------------------------------------------------------------------------------------
First First % Change Due to
Quarter Quarter Total --------------------------------------
2003 2002 % Change Price Volume/Mix Exchange
--------------------- ---------- --------------------------------------
Specialty Materials:
North America $78.3 $75.1 4% -1% 5% 0%
Latin America (1) 0.5 0.2 - - - -
Asia/Pacific Rim 4.0 3.1 29% -3% 32% 0%
Europe/Middle East/Africa 25.3 24.7 2% -2% 1% 3%
---------------------------------------------------------------------------
Total $108.1 $103.1 5% -1% 5% 1%
- --------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Selling volumes were up 5% overall principally in North America because certain
customers were restocking from low year-end inventory levels and there were high
purchases of replacement rotorcraft parts.
Earnings from operations were $22.3 or 21% of sales in the first quarter of 2003
compared to $20.5 or 20% of sales in the first quarter of 2002. The improvement
was principally due to leverage from the higher sales and production volumes
offset somewhat by higher employee benefit costs and insurance costs.
Building Block Chemicals:
- --------------------------------------------------------------------------------------------------------------------------
First First % Change Due to
Quarter Quarter Total --------------------------------------
2003 2002 % Change Price Volume/Mix Exchange
--------------------- ---------- --------------------------------------
North America $20.9 $13.9 50% 16% 34% 0%
Latin America (1) 1.5 0.6 - - - -
Asia/Pacific Rim 14.1 10.6 33% 34% -1% 0%
Europe/Middle East/Africa 17.2 5.7 202% 18% 152% 32%
---------------------------------------------------------------------------
Total $53.7 $30.8 74% 22% 46% 6%
- --------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Selling volumes were up 46% overall and principally in North America and Europe.
Acrylontrile sales accounted for the majority of the volume increases in
addition to the increase in selling prices. Acrylonitrile supply remains tight
primarily in Europe and Asia.
Earnings from operations were $4.3 in the first quarter of 2003 compared to a
loss of $0.5 in the first quarter of 2002. The improvement was principally due
to leverage from higher sales and production volumes partially offset by higher
raw material costs primarily ammonia and propylene, higher energy costs,
principally natural gas, and higher employee benefit costs and insurance costs.
LIQUIDITY AND FINANCIAL CONDITION
At March 31, 2003, the Company's cash balance was $92.8, a decrease of $117.2
from year-end 2002. In March 2003 the Company repaid $100.0 of its long-term
debt which had been classified as a current liability.
Net cash flows provided by operating activities were $10.1 for the first quarter
of 2003, compared to $21.6 for the same period of 2002.
Accounts receivable increased as a result of the increase in sales. Inventory
increased as a result of the higher capacity utilization in addition to certain
of the Company's plants campaigning production. Accounts payable also increased
as a result of increased production levels. Accrued expenses decreased as the
Company made payments of approximately $17 for incentive compensation and profit
growth sharing achieved in 2002. Payments made in the same period of 2002 for
incentive compensation and profit growth sharing were minimal as a result of
most 2001 targets not being met.
Net cash flows used for investing activities were $18.8 for the first quarter of
2003 compared to $11.6 for the same period of 2002. The major activity in the
first quarter of 2003 was the ongoing renovation of the Specialty Chemicals
research facility which is expected to continue into 2004. For the full year
2003, the Company expects capital spending to be in a range of $90.0 to $100.0.
14
The Company believes that, based on its expected operating results for 2003, it
will be able to fund operating cash requirements and planned capital
expenditures through the end of 2003 from its internal cash generation. For
further discussion of risks, see Qualitative and Quantitative Disclosures About
Market Risk and Comments on Forward Looking Statements below.
Net cash flows used for financing activities totaled $109.6 for the first
quarter of 2003 compared to $2.3 for the same period of 2002. In March 2003, the
Company repaid $100.0 of its debt. In the first quarter of 2003, the Company
repurchased approximately 384,100 shares of stock at a cost of $11.3 that
completed its previous stock repurchase authorization and that included the
purchase of 57,600 shares under its new authorization.
In April 2002, the Company executed a $100.0, three-year unsecured revolving
credit agreement and a $100.0, 364-day unsecured revolving credit agreement with
a one-year term out option which was renewed in April 2003. These two agreements
replaced a $200.0 unsecured revolving credit agreement that was due to expire in
July 2002. Revolving loans under the new agreements are available for the
general corporate purposes of the Company and its subsidiaries, including
without limitation, for purposes of making acquisitions. The credit agreements
contain covenants customary for such facilities. There are no outstanding
borrowings under these credit agreements at the end of the first quarter of
2003.
OTHER
2003 Outlook
The Company's strong momentum plus its actions in the first quarter of 2003 lead
to an upward revision of its earnings per diluted share (EPS) guidance. In
January 2003 the Company forecasted full year 2003 earnings per diluted share to
increase approximately 5% over the 2002 adjusted EPS of $2.04. For comparability
purposes, the Company has excluded from its 2002 annual reported net earnings of
$79.3 and annual diluted earnings per share of $1.96 net restructuring charges
of $9.4 after tax, or $0.23 per diluted share, and a net credit related to prior
year research and development tax credits. The net credit for research and
development tax credit consists of the following: a reduction of income tax
expense of $6.0 or $0.15 per diluted share; interest income of $2.0 or $0.03 per
diluted share; and a charge of $1.7 or $0.03 per diluted share for
administrative expenses for external costs associated with this tax planning.
There remains considerable uncertainty in the global economy. Natural gas costs
in the United States and global oil prices, while at lower levels than earlier
in the quarter, are still high continuing the upward bias on raw materials and
this could have a significant adverse impact particularly in Specialty
Chemicals. Assuming no further decline in the global economy, and taking into
account its results for the first quarter of 2003 plus its anticipated lower
effective tax rate, the Company now forecasts full year EPS to be up
approximately 10% over 2002's adjusted EPS of $2.04. The EPS forecast for 2003
includes the $0.04 per diluted share for the ongoing expense for the adoption of
FAS 143 but excludes the associated cumulative effect charge recorded in the
first quarter 2003. The full year outlook for the individual segments follows.
In the Water and Industrial Products segment, the Company projects sales to
increase about 6% with new products and geographical expansion accounting for 3%
and the favorable impact of exchange rate changes accounting for the balance.
However, operational excellence initiatives plus the favorable impact of
exchange rate changes will not be able to offset the headwinds from higher raw
material costs, particularly propylene, and the Company now expects full year
earnings to be down about 5-10% from 2002 for this segment.
For the Performance Products segment, the Company still anticipates overall
market growth being flat. However through international expansion and new
products, this segment expects sales to increase about another 3% with the
favorable impact of exchange rate changes accounting for another 3%. The
resulting profit and leverage from the higher sales and additional operational
excellence programs should more than offset the higher than expected raw
material costs derived from ammonia and methanol derivatives. The net result is
that the Company now expects earnings to increase approximately 10% over the
prior year for this segment.
In Specialty Materials, the markets for commercial aircraft appear to be holding
as expected although recent challenges to commercial air travel seem to indicate
possible further weakness. The Company is remaining cautious in its estimate for
this segment and is anticipating that the commercial aerospace market will
soften. The Company has built into its revised estimate for this segment some
further reductions in demand for commuter and business jets. The expectation now
is for Specialty Materials 2003 sales to be flat year on year and earnings to be
about 10%-12% lower than 2002 given a less favorable mix and increased employee
benefit costs and insurance costs.
In Building Block Chemicals, the Company is forecasting demand for 2003 to
remain at the levels experienced in the second half of 2002 and for most of its
plants to be run generally at capacity levels. Raw material and energy costs are
higher than
15
originally anticipated but selling prices are also higher. The net result of the
above should be 2003 full year earnings to be in a range of $12-15 million for
Building Block Chemicals.
The Company's guidance for earnings from associated companies remains unchanged
at about 20% over 2002. The estimated effective tax rate for 2003 is reduced to
30% from 2002's 33.5% as previously described.
Based on the above full year assumptions, the Company expects second quarter
2003 EPS to be in the range of $0.50 to $0.55. The Company will next update the
2003 outlook when it reports its second quarter 2003 operating results. There
can be no assurance sales or earnings will develop in the manner projected.
Actual results may differ materially. See "Comments on Forward Looking
Statements"
COMMENTS ON FORWARD-LOOKING STATEMENTS
A number of the statements made by the Company in the Quarterly Report on Form
10-Q, or in other documents, including but not limited to the Company's Annual
Report to Stockholders, its press releases and other periodic reports to the
Securities and Exchange Commission, may be regarded as "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995.
Forward-looking statements include, among others, statements concerning the
Company's (including its segments) outlook for the future, the accretiveness of
acquisitions, the financial effects of divestitures, pricing trends, the effects
of changes in foreign exchange rates and forces within the industry, the
completion dates of and expenditures for capital projects, expected sales
growth, operation excellence strategies and their results, long-term goals of
the Company and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and,
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in global and regional economies; the
financial well-being of end consumers of the Company's products, particularly
the airline industry; changes in demand for the Company's products or in the
costs and availability of its raw materials and energy; customer inventory
destocking; the actions of competitors; currency exchange and interest rate
fluctuations; technological change; the Company's ability to renegotiate
expiring long-term contracts; changes in employee relations, including possible
strikes; government regulations; government funding for those military programs
that utilize the Company's products; litigation, including its inherent
uncertainty; difficulties in plant operations and materials transportation;
environmental matters; the results of and recoverability of investments in
associated companies; returns on employee benefit plans assets and changes in
the discount rates used to estimate employee benefit liabilities; changes in the
medical cost trend rate; changes in accounting principles or new accounting
standards; war, terrorism or sabotage; epidemics; and other unforeseen
circumstances. A number of these factors are discussed in this and other of the
Company's filings with the Securities and Exchange Commission.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of market risks at year-end, refer to Item 7A of the Company's
2002 Annual Report on Form 10-K for the year ended December 31, 2002, filed with
the Securities and Exchange Commission on February 21, 2003. During 2003, the
Company executed various foreign exchange transactions that do not materially
alter the market risk assessment performed as of December 31, 2002. Other 2003
financial instrument transactions include:
COMMODITY PRICE RISK: The Company uses natural gas forward contracts to
selectively hedge gas utility requirements at its Building Blocks Chemicals
Fortier manufacturing facility. These contracts typically correlate highly to
the actual purchases of the commodity and have the effect of securing
predetermined prices that the Company pays for the underlying commodity. While
these contracts are primarily structured to limit the Company's exposure to
increases in commodity prices, they can also limit the potential benefit the
Company might have otherwise received from decreases in commodity prices. The
Company also uses natural gas swaps to selectively hedge utility requirements at
certain of its other facilities.
At March 31, 2003, the Company had outstanding natural gas forward contracts
with a notional value of $12.5 and delivery dates of April 2003 through February
2004 and outstanding natural gas swaps with a fair value of $0.3, which will be
reclassified into Manufacturing Cost of Sales through March 2004 as these swaps
are settled.
INTEREST RATE RISK: In March 2003 the Company repaid $100.0 of its outstanding
borrowings. At March 31, 2003, the outstanding borrowings of the Company
consisted primarily of fixed rate long-term debt, which had a carrying value of
16
$216.2, a face value of $220.0 and a fair value, based on dealer quoted values,
of approximately $237.5. Assuming other factors are held constant, interest rate
changes generally affect the fair value of debt, but do not impact the carrying
value, earnings or cash flows. Accordingly, assuming a hypothetical increase of
1% in interest rates and all other variables remaining constant, interest
expense would not change; however, the fair market value of the fixed rate
long-term debt would decrease by approximately $7.1, but this change would not
impact the carrying value.
EQUITY PRICE RISK: At December 31, 2002, the Company had 100,000 put options
outstanding which entitled the holders to sell an aggregate of 100,000 shares of
the Company's common stock to the Company at an exercise price of $29.505 per
share. During 2002, the Company received aggregate premiums of approximately
$0.3 on the sale of such options. During the first quarter of 2003, the holder
elected to exercise the 100,000 put options, which were settled by the Company
purchasing 100,000 shares of its common stock at the exercise price of $29.505
per share. The closing stock price on the settlement date was $27.98 per share.
At March 31, 2003, no put options were outstanding.
Item 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this Quarterly Report on Form 10-Q,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures as defined in Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's current disclosure controls and procedures are
effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the evaluation by the Chief Executive Officer and
Chief Financial Officer.
The design of any system of controls and procedures is based in part upon
certain assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
17
Part II - Other Information
Item 1. LEGAL PROCEEDINGS
The Company is the subject of numerous lawsuits and claims incidental to the
conduct of its or its predecessors' businesses, including lawsuits and claims
relating to product liability, personal injury, environmental, contractual,
employment and intellectual property matters. Many of the matters relate to the
use, handling, processing, storage, transport or disposal of hazardous
materials. The Company believes that the resolution of such lawsuits and claims,
including those described below, will not have a material adverse effect on the
consolidated financial position of the Company, but could be material to the
consolidated results of operations of the Company in any one accounting period.
Cytec and/or American Cyanamid Company ("Cyanamid"), the Company's former parent
company, are among several defendants in more than 35 cases, pending in various
state and federal courts, in which plaintiffs assert claims for personal injury,
property damage, and other claims for relief relating to lead pigment that was
used as an ingredient decades ago in paint for use in buildings. Cytec has an
agreement to indemnify Cyanamid in connection with such suits. The different
suits were brought by government entities and/or individual plaintiffs, on
behalf of themselves and others. The suits variously seek injunctive relief and
compensatory and punitive damages, including funds for the cost of monitoring,
detecting and removing lead based paint from buildings; for personal injuries
allegedly caused by ingestion of lead based paint; and plaintiffs' attorneys'
fees. The Company and Cyanamid believe that the suits against them are without
merit and are vigorously defending against all such claims.
The Company has access to a substantial amount of primary and excess general
liability insurance for property damage under the policies of Cyanamid. The
Company believes these policies are available to cover a significant portion of
both its defense costs and indemnity costs, if any, for lead related property
damage. The Company is currently pursuing an agreement with various of its
insurers concerning coverage with respect to these matters.
In January 1999 the Company received a subpoena to testify before, and provide
documents to, a federal grand jury in California investigating the carbon fiber
and prepreg industry. The Company manufactures prepregs as part of its advanced
composites product line and, since its acquisition of BP's carbon fibers
business in August 2001, also manufactures carbon fiber. The Company has no
reason to believe that it is a target of the grand jury investigation. After the
grand jury investigation was commenced, the Company and the other companies
subpoenaed to testify before the grand jury were named as defendants in civil
antitrust class actions in state and federal courts in California on behalf of
purchasers of carbon fiber, which the complaints defined to include prepregs
manufactured from carbon fiber. In each case the complaint alleges that the
defendants, manufacturers of carbon fiber and/or prepregs manufactured
therefrom, conspired to fix the prices of their products. The Company and other
companies have also been named as defendants in a state civil antitrust action
in the state court of Massachusetts. The Company denies that it conspired to fix
prices. In connection with its acquisition of BP's carbon fibers business, the
Company was indemnified by BP on various matters including any liabilities BP's
carbon fibers business may have in these proceedings. The indemnity does not
cover any liability the Company may have in its own right and not as a successor
to BP's carbon fibers business.
See also the first four paragraphs of "Environmental Matters" under "Business"
in Item 1 of the Company's 2002 Annual Report on Form 10-K and Note 12 of the
Notes to the Consolidated Financial Statements (unaudited) on Part I, item (1).
In addition to liabilities with respect to the specific cases described above,
because the production of certain chemicals involves the use, handling,
processing, storage, transportation and disposal of hazardous materials, and
because certain of the Company's products constitute or contain hazardous
materials, the Company has been subject to claims of injury from direct exposure
to such materials and from indirect exposure when such materials are
incorporated into other companies' products. There can be no assurance that, as
a result of past or future operations, there will not be additional claims of
injury by employees or members of the public due to exposure, or alleged
exposure, to such materials.
Furthermore, the Company also has exposure to present and future claims with
respect to workplace exposure, workers' compensation and other matters, arising
from past events.
18
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). EXHIBITS
See Exhibit Index on page 23 for exhibits filed with this Quarterly Report on
Form 10-Q.
(b). REPORTS ON FORM 8-K
The Company has not filed a current report on Form 8-K during the first quarter
of 2003.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYTEC INDUSTRIES INC.
By:/S/ James P. Cronin
----------------------
James P. Cronin
Executive Vice President and Chief Financial
Officer
April 30, 2003
20
CERTIFICATIONS
I, David Lilley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cytec Industries
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ David Lilley
- ------------------------------
David Lilley
Chairman, President and
Chief Executive Officer
April 30, 2003
21
CERTIFICATIONS
I, James P. Cronin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cytec Industries
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ James P. Cronin
- ---------------------------------
James P. Cronin
Executive Vice President and
Chief Financial Officer
April 30, 2003
22
Exhibit Index
10.12(a) 1993 Stock Award and Incentive Plan, as amended through April
17, 2003
12 Computation of Ratio of Earnings to Fixed Charges for the three
months ended March 31, 2003 and 2002
99.1 Certification of David Lilley, Chief Executive Officer Pursuant
To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of
The Sarbanes-Oxley Act Of 2002
99.2 Certification of James P. Cronin, Chief Financial Officer Pursuant
To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of
The Sarbanes-Oxley Act Of 2002
23